Director Liability in Insolvency and Its Vicinity
Later published in Oxford Journal of Legal Studies, Volume 38, Issue 2, 1 June 2018, Pages 382–409
26 Pages Posted: 21 May 2017 Last revised: 3 Dec 2018
Date Written: March 2018
Under English law, the duties owed by company directors change in the vicinity of insolvency so as to require directors to have particular regard to the interests of creditors. This duty-shifting rule is usually attributed to the 1987 decision of the Court of Appeal in West Mercia Safetywear Ltd v Dodd. The West Mercia Safetywear rule is conventionally explained as a device to constrain the incentives that directors might otherwise have (particularly where their interests are aligned with shareholders) to pursue ‘high-risk, high-reward’ strategies when deploying company assets in the vicinity of insolvency. On this analysis, West Mercia Safetywear overlaps with the wrongful trading rule in s 214 of the Insolvency Act 1986. This paper reviews the cases in which West Mercia Safetywear has been invoked and applied, and reports that the rule has in fact performed a second – quite different – function: the regulation of payments made to company creditors in the lead-up to the commencement of insolvency proceedings. This suggests that West Mercia Safetywear may be better understood as a complement to statutory rules on the avoidance of preferences (in English law, s 239 of the Insolvency Act 1986). When combined with rules on accessory liability, West Mercia Safetywear may provide a remedy where statutory avoidance rules on preferences cannot, specifically in cases where creditors are able to strategically structure their affairs with the company so as to escape the operation of the statute.
Keywords: corporate insolvency; bankruptcy; directors' duties; preferences
JEL Classification: G33, G34
Suggested Citation: Suggested Citation